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Yahoo
07-04-2025
- Business
- Yahoo
Why Rich People Pay Less in Taxes and How You Can Use Their Strategies
Billionaire Warren Buffet famously proclaims to pay a lower effective tax rate than his secretary, as he wrote in a New York Times op-ed. He does so by simply taking advantage of IRS rules that enable many wealthy people to minimize taxes, such as how investment income is often taxed at a lower rate than ordinary income, especially by avoiding payroll taxes for Social Security and Medicare. Check Out: See Next: That's not to say that being rich automatically means you pay less in taxes and in terms of the total dollar amount, the rich tend to pay significantly more. However, the tax rates many wealthy people pay can be lower than what an average worker pays based on strategic tax planning and how they earn their income. Some of the below strategies may also be available to you, even if you're not rich. Investors like Buffet or executives at large corporations can often lower their effective tax rate by having relatively low salaries and instead earning a lot of money from stock-based compensation, such as dividends or capital gains from selling company stock. '[Wealthy people] don't only rely on W-2 income as employees like most middle-class individuals. Their income does not only come from W-2 wages, where you are limited — they also have investment income like dividends and capital gains,' said Armine Alajian, founder and CPA at Alajian Group. Discover Next: Not all investment income is taxed at favorable rates, but qualified dividends and long-term capital gains are. These rates generally max out at 23.8% and for low- and middle-income earners, rates can be 0% or 15%. Even if you do end up paying the top rate, that's often lower than regular income tax rates, which max out at 37%. Plus, investment income is not subject to the 7.65% that employees pay for Social Security and Medicare taxes, also called payroll taxes. So, the more that you can shift your earnings toward investment income rather than regular wages, the more you can potentially lower your effective tax rate. For some, that might mean taking the risk of accepting a job that pays a decent amount of compensation in the form of stock options, rather than salary. This tax difference can also be a motivator to invest more. Down the road, you might decide to withdraw some of your investment gains if they're taxed as long-term capital gains, which might leave you with more money for something like a vacation compared with picking up extra shifts at your job. Timing also matters when it comes to taxes, such as how you might want to lower your income in years when tax rates would be high and vice versa. For example, some tax experts suggest claiming less income in 2025, given that tax rates will potentially drop in 2026 if new tax legislation passes. For simple math's sake — not necessarily real-world numbers — suppose you could earn $40,000 in taxable income in 2025 at a 15% average tax rate and $60,000 in 2026 at a 10% rate. That would mean you'd pay $12,000 in taxes on $100,000 in income across two years. Yet if you flipped it around and earned $60,000 this year and $40,000 next, you'd pay $13,000 in taxes — an extra $1,000, even though the total income didn't change. Because many wealthy people don't rely on W-2 income, they have more flexibility to take advantage of these types of situations. 'They have businesses, where they can control their losses and profits,' Alajian said. For example, a business owner might try to wrap up and bill for a client project at the beginning of January 2026 rather than the end of December 2025, as a small delay could end up making a big tax difference. Yet this strategy is available to anyone with self-employment income, regardless of wealth. Maybe you give yourself permission to enjoy the December holidays while easing off on your side hustle, while working a little extra the following January, assuming that would result in a tax benefit. Timing is also part of strategies like tax-loss harvesting, where you sell investments that are down to create a taxable loss, while then buying different investments that will hopefully appreciate in the future. Although you're generally just delaying taxes in this situation, that typically provides net benefits. With inflation for example, paying $1,000 in taxes this year is essentially more expensive than paying $1,000 five years from now, so deferring taxes can increase your purchasing power. You don't have to be rich to tax-loss harvest. Nowadays, several financial apps can automate the process for you or if you do work with a human advisor, they can often guide you. Lastly, while you might be looking at your tax situation now as the filing deadline looms, it's too late for many tax maneuvers that could save you money, as most apply to what happened the preceding year. So, instead of just trying to find tax savings during tax season, you might take a page out of the wealthy's playbook. 'Wealthy people tend to do tax planning throughout the year, in which they project their income and plan around that with different strategies available for their current needs — and this is done constantly throughout the year, every year,' Alajian explained. In doing so, you might find ways to shift income, qualify for credits and deductions and ultimately set yourself up for a smaller tax bill. More From GOBankingRates 6 Used Luxury SUVs That Are a Good Investment for RetireesI'm Retired and Regret Moving to Arizona -- Here's Why 5 Types of Vehicles Retirees Should Stay Away From Buying This article originally appeared on Why Rich People Pay Less in Taxes and How You Can Use Their Strategies Sign in to access your portfolio
Yahoo
30-03-2025
- Business
- Yahoo
Will the US Implement a Caregiver Tax Credit? Experts Explain
Millions of Americans provide unpaid care for aging or ill family members, and it's costing them. 'Family caregivers spend, on average, over a quarter of their income on providing said care,' said Javier Palomarez, founder and CEO of the United States Hispanic Business Council. 'Considering the sustained rise of healthcare costs, this is only sure to increase.' Learn More: Read Next: To help ease the financial burden, lawmakers have proposed the Credit for Caring Act, a bill that would provide tax relief to eligible family caregivers. Experts say the credit could offer meaningful support — but its future is far from certain. The proposal would give caregivers a financial break on out-of-pocket expenses. 'The Credit for Caring Act proposes a tax credit of up to $5,000 per year based on 30% of 'qualified expenses' to the extent such expenses exceed $2,000,' explained Annette Nellen, a certified public accountant (CPA), attorney, and tax professor at San Jose State University. 'So if someone has expenses of $2,000 or less, no credit.' To qualify, 'the expenses must be paid by an 'eligible caregiver' who pays 'qualified expenses' for a 'qualified care recipient.' The taxpayer claiming the credit must have earned income above $7,500.' Nellen also notes that the credit is intended for middle to low-income individuals who pay these expenses. 'The credit starts to phase out when modified AGI exceeds $75,000 ($150,000 for a married couple),' she explained. Armine Alajian, CPA and founder of the Alajian Group, added context to what counts as a qualified expense: 'Those expenses might include adult day care, home improvements like safety handrails or paying for in-home healthcare aides.' Check Out: 'A tax credit would provide immediate relief to an estimated 53 million Americans that currently serve as unpaid family caregivers and provide an economic lifeline for those that have spent their time and money taking care of others,' said Palomarez. Shane Lucado, founder and CEO of InPerSuit, emphasizes the potential for financial relief: 'Many caregivers spend $7,000 or more each year on services such as home health aides and medical supplies, so a tax credit could ease some of that financial pressure.' Lucado also sees wider economic benefits. 'This credit would lower financial burdens for caregivers and lead to higher workforce participation rates from those who need to quit employment to provide care for family members,' he added. 'Workplace productivity losses could decrease when employees balance their work responsibilities with caregiving tasks.' Palomarez agrees the credit could improve care quality, too. 'The tax credit will also enable family caregivers to invest in higher quality equipment, medicine and surgeries,' he noted. Support for the bill is strong, but progress has been slow. 'This bill, which is something AARP has been trying to make a reality for more than 10 years, is one of the few issues that has bipartisan support among lawmakers and the public,' said Alajian. 'But despite that, a similar version of the bill didn't make it out of committee last year, so nothing is guaranteed.' Even if the bill becomes law, experts point out its limitations. 'While a tax credit of up to $5,000 would be a helpful sum,' said Alajian. 'Sadly, many people are forced to limit or even quit their jobs when caregiving becomes a full-time job in itself. So, it would be far from the amount needed to compensate for leaving a career.' Nellen raises another concern: The difficulty of navigating tax-based aid. 'The complexity of definitions, recordkeeping and calculations begs the question of whether providing this financial assistance through the tax law is the best approach,' Nellen said. 'Alternatives include providing assistance directly to the 'qualified care recipient' and offering more resources for care (care facilities, visiting nurses, etc.).' The bill's future is still unclear. 'Turning this tax credit into law presents difficulties since lawmakers must weigh the cost of its rollout against expected revenue declines,' said Lucado. 'The federal government has to find a way to pay for this credit while avoiding major effects on current social programs or deficit growth.' In other words, Congress would need to find money to fund the credit without cutting other programs or increasing the national debt. Still, with a growing population of unpaid caregivers and rising medical costs, experts agree the need is real — even if the solution is complicated. More From GOBankingRates 5 Types of Vehicles Retirees Should Stay Away From Buying 12 SUVs With the Most Reliable Engines 4 Things You Should Do if You Want To Retire Early 6 Big Shakeups Coming to Social Security in 2025 This article originally appeared on Will the US Implement a Caregiver Tax Credit? Experts Explain
Yahoo
08-02-2025
- Business
- Yahoo
I'm an Accountant: 4 Deductions Most People Forget About That Cost You Money
Very few people like tax season, but missing out on valuable deductions could mean leaving money on the table. Many taxpayers overlook key write-offs that could lower their bills or put more money in their pockets. 'The reason people commonly overlook these deductions might be because they may have switched from taking the standard deduction to itemizing deductions,' said Armine Alajian, accountant and founder of the Alajian Group. 'There may also be a simple lack of awareness, a fear of being audited, getting it wrong or due to a lack of good record-keeping.' GOBanking Rates talked to accountants and tax experts about the four deductions most people forget about that cost you money. Discover More: Explore Next: 3 Sneaky Things You Didn't Realize Your Tax Software Was Doing — And How to Stop Them This Year According to the IRS, the 2017 Tax Cuts and Jobs Act (TCJA) suspended the deduction of common job-hunting expenses, such as resume preparation and travel out of town for interviews or career fairs, from an individual's federal income tax returns for tax years 2018 through 2025. However, some states allow deductions for job search expenses on state income tax returns. For specific information, check with your State Department of Revenue (which collects state taxes) or consult a tax advisor. Find Out: In addition, if individuals don't qualify for job search deductions but obtain side gigs or bridge jobs — such as ride-share drivers — they could be eligible for business mileage on their cars, according to Intuit Turbo Tax. Also according to the IRS, self-employed individuals who use their home as their primary place of business can deduct part of the operating expenses and depreciation of their home can also qualify for tax deductions. Alajian said that taxpayers can deduct out-of-pocket medical and dental expenses for themselves, spouses or dependents during the taxable year. 'But if only these expenses exceed 7.5% of your adjusted gross income for the year,' Alajian said. 'Anything less than that is not deductible. But that's a good thing. It means your medical expenses aren't too high.' Kevin Quinn, estate planning attorney at Legacy Counsellors, PC, said another healthcare-related deduction is the cost of uninsured long-term care for seniors. 'Home health or nursing home care is a Schedule-A deduction,' Quinn said. 'It is missed in most cases because many seniors don't itemize their deductions. It is important to look at the standard deduction versus the Schedule-A deduction to see which is most financially beneficial before filing.' Taxpayers can deduct home mortgage interest on the first $750,000 or $375,000 if married and filing separately, per the IRS. 'With this, homeowners can subtract the amount of money they spend on mortgage interest from their taxable income, which can then lower the amount of taxes that they owe,' said Adam Hamilton, CEO of REI Hub. The company provides accounting software for rental property owners. Hamilton explained that the IRS offers standardized and itemized deduction options for this deduction. While the standardized deduction provides an exact sum, calculating the itemized deduction can take more work. 'Ultimately, the one you should do is the one that ends up being the highest amount because that gives you the biggest deduction,' Hamilton said. When itemizing deductions on your federal income tax return for the 2024 tax year, you can choose to deduct either state and local income taxes or state and local general taxes, but not both. Taxpayers should decide based on which option provides the greater benefit. For example, some taxpayers live in states without an income tax while others buy big items subject to sales taxes like cars, motor homes and RVs or renovate their homes. Individuals can also use the IRS's Sales Tax Deduction Calculator to evaluate their options. More From GOBankingRates3 Things You Must Do When Your Savings Reach $50,000 Find Your State: The Best Banks of 2025 For Each State 9 Things You Must Do To Grow Your Wealth in 2025 This article originally appeared on I'm an Accountant: 4 Deductions Most People Forget About That Cost You Money
Yahoo
08-02-2025
- Business
- Yahoo
I'm an Accountant: 4 Deductions Most People Forget About That Cost You Money
Very few people like tax season, but missing out on valuable deductions could mean leaving money on the table. Many taxpayers overlook key write-offs that could lower their bills or put more money in their pockets. 'The reason people commonly overlook these deductions might be because they may have switched from taking the standard deduction to itemizing deductions,' said Armine Alajian, accountant and founder of the Alajian Group. 'There may also be a simple lack of awareness, a fear of being audited, getting it wrong or due to a lack of good record-keeping.' GOBanking Rates talked to accountants and tax experts about the four deductions most people forget about that cost you money. Discover More: Explore Next: 3 Sneaky Things You Didn't Realize Your Tax Software Was Doing — And How to Stop Them This Year According to the IRS, the 2017 Tax Cuts and Jobs Act (TCJA) suspended the deduction of common job-hunting expenses, such as resume preparation and travel out of town for interviews or career fairs, from an individual's federal income tax returns for tax years 2018 through 2025. However, some states allow deductions for job search expenses on state income tax returns. For specific information, check with your State Department of Revenue (which collects state taxes) or consult a tax advisor. Find Out: In addition, if individuals don't qualify for job search deductions but obtain side gigs or bridge jobs — such as ride-share drivers — they could be eligible for business mileage on their cars, according to Intuit Turbo Tax. Also according to the IRS, self-employed individuals who use their home as their primary place of business can deduct part of the operating expenses and depreciation of their home can also qualify for tax deductions. Alajian said that taxpayers can deduct out-of-pocket medical and dental expenses for themselves, spouses or dependents during the taxable year. 'But if only these expenses exceed 7.5% of your adjusted gross income for the year,' Alajian said. 'Anything less than that is not deductible. But that's a good thing. It means your medical expenses aren't too high.' Kevin Quinn, estate planning attorney at Legacy Counsellors, PC, said another healthcare-related deduction is the cost of uninsured long-term care for seniors. 'Home health or nursing home care is a Schedule-A deduction,' Quinn said. 'It is missed in most cases because many seniors don't itemize their deductions. It is important to look at the standard deduction versus the Schedule-A deduction to see which is most financially beneficial before filing.' Taxpayers can deduct home mortgage interest on the first $750,000 or $375,000 if married and filing separately, per the IRS. 'With this, homeowners can subtract the amount of money they spend on mortgage interest from their taxable income, which can then lower the amount of taxes that they owe,' said Adam Hamilton, CEO of REI Hub. The company provides accounting software for rental property owners. Hamilton explained that the IRS offers standardized and itemized deduction options for this deduction. While the standardized deduction provides an exact sum, calculating the itemized deduction can take more work. 'Ultimately, the one you should do is the one that ends up being the highest amount because that gives you the biggest deduction,' Hamilton said. When itemizing deductions on your federal income tax return for the 2024 tax year, you can choose to deduct either state and local income taxes or state and local general taxes, but not both. Taxpayers should decide based on which option provides the greater benefit. For example, some taxpayers live in states without an income tax while others buy big items subject to sales taxes like cars, motor homes and RVs or renovate their homes. Individuals can also use the IRS's Sales Tax Deduction Calculator to evaluate their options. More From GOBankingRates3 Things You Must Do When Your Savings Reach $50,000 Find Your State: The Best Banks of 2025 For Each State 9 Things You Must Do To Grow Your Wealth in 2025 This article originally appeared on I'm an Accountant: 4 Deductions Most People Forget About That Cost You Money
